As noted in a recently published FAQ section on the Department of Labor (DOL) website, the new fiduciary rule will
include proposed exemptions from the Employee Retirement Income Security Act’s
(ERISA) and the Internal Revenue Code’s restrictions on financial fiduciaries
receiving conflicted compensation, and the agency will request public input on the final
design of the exemptions.

The exact shape of the new fiduciary rule and any
accompanying exemptions remains unknown, with the proposed rule language reportedly
under preliminary review by the Office of Management and Budget. However, a speech by President Obama to the AARP suggested a crack-down on abuse
in the financial advisory industry is imminent, setting off a major adviser
and broker response calling the administration out of touch.

In a replay of the derailed 2010 effort to adopt a strict
new fiduciary standard applying broadly to brokers and advisers, there was both
pushback and applause from different industry practitioners. Some took clear offense
from the president’s suggestion that widespread abuse by financial advisers is
robbing millions of Americans of billions of dollars annually. Others, like the
AARP and fellow sponsors of www.saveourretirement.com,
repeated the president’s call for overdue reform.

As the dust settles a day later, more questions than answers
remain on the future of the long-running fiduciary redefinition effort. Details shared by the DOL suggest the list of exemptions will include a new
type of exemption that is more “principles-based, providing businesses with the
flexibility to adopt practices that work for them and adapt those practices to
changes we may not anticipate, while ensuring that they put their client’s best
interest first and disclose any conflicts that may prevent them from doing so.”

DOL says the fiduciary rule proposal will not cover Employee
Stock Ownership Plan (ESOP) valuations. It will also continue to allow
financial advisers to provide much-needed general education on retirement
savings, DOL says, though this is a claim many in the retirement advisory
industry strongly reject.

For example, Bradford Campbell, counsel with Drinker Biddle
& Reath, says lack of access to investment advice costs participants about
$100 billion per year in preventable investment mistakes, per the DOL’s own
estimates. Like others, he believes a stricter fiduciary rule will make it significantly harder for small-balance savers to hire advisers—who may not feel it is worth
taking on fiduciary risk for little compensation.

“Even as the White House and DOL are worried about
conflicts, the right public policy answer cannot be to say that we’d rather
have you get no advice simply because institutional products are cheaper than
retail products,” Campbell says. “Fees affect outcomes, but so do uninformed
financial decisions—and according to DOL, uniformed decisions cost a lot more.”

For its part, the DOL acknowledges that “advisers giving
sound advice deserve to be well paid for the important work they do, helping
workers build their nest egg so they can retire after years of hard work.” But
many in the industry feel the administration is grossly oversimplifying the
complex nature of compensation in the retirement planning industry—making common and even helpful client service transaction practices out to be “hidden fees” and “backdoor
payments.”

While its explanations have remained vague, DOL says it is
planning to target advisers who “may have a conflict of interest if he or
she gets paid for steering clients into one investment product instead of another.”

“Clients are sometimes unaware of these backdoor payments
because they can be hidden in fine print or not disclosed at all,” DOL says in
its fiduciary rule FAQ. “These fees can give advisers an incentive to make
recommendations that generate the highest fees for them, rather than the best investment
return for their client. Independent academic research suggests that conflicts
of interest are costing middle class families billions of dollars per year.”

Cindy Dash, chief operating officer of Broadridge’s Matrix
Financial Solutions, which works directly with advisers on investing and compliance,
feels that, whatever the final form of the fiduciary definition, it should be designed to lead
to increased awareness of choice and cost among plan sponsors and participants.

Transparency is
great for everyone, she notes. Investors, like any customer, want to
know what they are paying for. She suggests that a strengthened fiduciary standard
will lead to wider consideration and adoption of open architecture platform
opportunities—so advisers with more flexibility in this area may fare better
than others.

The wide variety of responses show it’s not just the advisory industry that is concerned about the new fiduciary proposal impacting established business practices.
Looking beyond adviser and broker responses, several insurance trade groups
also stepped in to oppose the administration’s claims that retirement plan
participants are being widely taken advantage of.

ACLI, a U.S. trade association representing legal reserve life
insurance companies, put out a statement arguing the fiduciary rule proposal
could put much needed financial guidance and education out of reach of millions
of Americans.

“ACLI member companies and their representatives are at the
forefront of helping people save for retirements that can last for decades and
secure lifetime streams of income to supplement Social Security,” the group
warns. “While details of the proposal have yet to be unveiled, ACLI fears the
administration’s plan to once again seek to expand the definition of ‘investment
advice fiduciary’ could ultimately serve to limit investor choice, promote
conflicting regulation of the retirement market, prohibit access to investor
guidance and raise the costs of saving for retirement.”

Like others, ACLI says it will look closely at the proposal language when it finally surfaces, with a goal of collaborating with the administration on a
plan that helps ensure Americans continue to receive the guidance and education
they need to achieve financial security in retirement.

Even the U.S. Chamber of Commerce threw its hat into the
ring with a recent white paper, arguing it will be an ineffective and unwieldy approach for
the DOL to address concerns with its proposal to broaden the definition of
fiduciary advice by utilizing prohibited transaction exemptions (PTEs) “to
carve back the rule so that it is appropriate in scope.”

The paper suggests the history of the use of the exemptive
process to narrow overly broad rules “demonstrates the many problems of using
PTEs in this context.”

“The goal in this regulatory initiative should be to enhance
the ability of individuals to adequately save for retirement,” the paper
continues. “We are very concerned that the DOL—in the name of investor
protection—is actually taking an approach that will harm the very people it is
trying to protect. By definition, a regulatory regime that prohibits every
transaction unless it is specifically allowed through a PTE may unnecessarily
eliminate choices and make it difficult to find new ways to better serve
investors.”

Other groups have echoed that argument, suggesting that no
matter how well-crafted the PTEs are, they will prove to be insufficiently
narrow and inflexible to accommodate the many beneficial ways that financial
professionals serve the needs of investors today and in the future.

“As such, to the extent the DOL can demonstrate that changes
are necessary, it should explore a narrowly-tailored approach that balances the
need for protection of plan participants and also affords them the education
and investment choices they need for a secure retirement,” the Chamber of
Commerce concludes.